Compare high interest savings accounts

Most banks and deposit-taking institutions (DPIs) in Australia offer either a transaction account or a savings account, or a combination of the two. With a transaction account, you earn less interest on your deposit, but you can withdraw or spend the money in the account more easily. On the other hand, a savings account is designed to earn you higher interest while limiting withdrawals. Some people may prefer opening a high-interest savings account which can help them build up their savings faster while imposing more conditions on the use of the money.

The higher interest offered on these accounts is meant to incentivise saving, but you need to make regular deposits to boost your nest egg. Equally, by making fewer withdrawals, the money in the account will accumulate faster. 

Check the account provider’s terms and conditions to see if you need to maintain a minimum balance or deposit a fixed amount every month. Some providers may limit the number of withdrawals you can make and impose penalties, such as reducing the interest rate, if you withdraw more often. In addition, banks may require you to link your high-interest savings account to a transaction account, which can be used for withdrawals and ensure you access the savings account less often

High-interest savings accounts accelerate the growth of your savings by compounding the interest and adding that to the amounts you deposit. Compound interest is calculated as a percentage of the savings account balance and paid by the account provider, usually monthly or annually. 

As a result, interest earned on your savings in the past is also accounted for, not just the amounts deposited, in effect adding interest on interest. Regularly depositing even small sums of money into the account can translate into a significant increase in your savings. 

Suppose you opened a high-interest savings account in an Australian bank offering two per cent interest, compounded monthly, with an initial deposit of $100. The account provider would include the interest earned on this sum in the first month when calculating the interest earned for the second month. Accordingly, even if you didn’t deposit any amount in the second month, you’d earn more interest than you did in the first month. 

On the deposit of $100, you’d earn $2 in interest in one year, $4 by the end of the second year, etc. After five years, your account balance would total $111. However, if you deposited $10 every month in addition to the initial deposit, your account would have $741 in it at the end of five years. See the table below to understand in detail how compound interest works in these two cases.

High-interest savings accounts are usually either introductory savings accounts or conditional savings accounts, as described below.

• Introductory savings accounts:These typically offer a higher rate, sometimes called a promotional rate, for the first few months after you open the account, after which you earn interest at the base rate. Consider checking the difference between the promotional rate and the base rate prior to opening an account.
  
  
• Conditional savings accounts: As the name suggests, these accounts require you to meet specified conditions such as maintaining a minimum balance, making regular deposits, making few or no withdrawals in a calendar month, and so on. 

When comparing high-interest savings accounts, you may also come across online savings accounts which can be operated through the provider’s Internet banking site or mobile app. Some purely digital providers may also offer high-interest online savings accounts with no fees, although the lack of a physical location limits customers’ options for getting any complaints resolved. In most cases, you’ll need to link the online savings account to a transaction account, either with another bank or with the same provider. Remember to check if operating these transaction accounts involves paying admin or transaction fees.

Note that you need to declare the interest you earn from your high-interest savings accounts on your tax return. You can check your annual interest income through the bank’s website or app, but you may receive a statement from the bank as well. If you've linked your Tax File Number (TFN) to your MyGov account, the tax you owe on the interest earned will probably be calculated automatically.

Opening a high-interest savings account has several benefits, as elaborated below. 

• Low risk, low cost: You can compare and choose a high-interest savings account that doesn’t charge high account fees and thereby preserve more of your savings. At the same time, most banks and other regulated financial institutions that hold an Australian Credit Licence are backed by the Australian government guarantee, which protects deposit account balances of up to $250,000 in the event the financial institution collapses. For this reason, savings accounts represent a lower risk as compared to other investment options like stocks.
  
  
• Fast-tracking your goals: If you’ve set yourself a financial goal, a high-interest savings account can offer the ideal path to realise it. Depending on the account type you choose and the kind of restrictions you’re comfortable with, you could even qualify for a bonus interest rate and speed up your journey.
  
  
• Ease of opening and closing accounts:A term deposit may get you better rates than a high-interest savings account, but you won’t have any access to your money for the duration of the deposit. The lack of a lock-in period allows you to move your money out of your high-interest savings accounts into a more lucrative investment whenever you prefer.
  
  
• Linked accounts: While you can opt for a high-interest savings account with fewer access conditions, you can earn more interest by minimising withdrawals. Instead, you could link the account to a transaction account and transfer funds between the two accounts when necessary. You can also set up direct debits to deposit a portion of your income into your savings monthly. Also, some account providers offer the benefit of rounding up debit card purchases to the nearest dollar and sending the spare change into your savings account instead. You can also choose other dollar amounts to round up to instead of the nearest dollar.

Like any other financial product, a good high-interest savings account should suit your financial circumstances and provide an ideal investment option. Comparing savings accounts offered by different providers is a recommended way of deciding whether the account’s benefits extend beyond the interest rate. You may want to consider the following factors.

Making any investment work for you can require taking a well-informed, smart approach and looking at the long-term use of the savings accounts offering high interest. You have to stick to the account terms diligently for the entire time you operate the account, but you also have to decide when to move your money into a more beneficial investment option. For instance, you could save up a certain amount and use it to pay the deposit when buying a house. Alternatively, you could set aside a part of your savings for trading in the stock market. 

Saving up money need not always be an investment - you may need the cash for emergency expenses such as hospitalisation or house repairs. You could also accumulate a vacation fund or a nest egg for your retirement. 

Irrespective of your reason for saving, you’ll need some amount of financial discipline to ensure you keep depositing funds regularly and earn the maximum interest possible. Also, remember that even the best high-interest savings account may not always be the most suitable for your needs, and you should compare different accounts periodically to see if you can save more by opening a different account.